Swap termination and the subordination of termination payments in the Lehman bankruptcy

Brian V Otero, Robert J Hahn, JR Smith and Stephen R Blacklocks, Hunton & Williams LLP

Lehman Brothers Holdings Inc’s 15 September 2008 bankruptcy was an event of default under thousands of derivatives contracts to which a Lehman entity was a party and for which Lehman Brothers Holdings was the guarantor. This default entitled the vast majority of Lehman’s counterparties to terminate these contracts, and almost all were terminated. The Lehman bankruptcy court will soon address a number of issues related to the termination of these contracts, including the enforceability of ‘flip clauses’ subordinating amounts payable to Lehman on the termination of credit default swaps backing synthetic collateralised debt obligations (CDOs).